Chapter 7 Bankruptcy
Most debtors prefer to declare Chapter 7 bankruptcy, since it eliminates most unsecured debts and is easier. However, due to reforms in 2005, not all debtors qualify for Chapter 7. In some cases, a debtor may be required to pay at least a portion of their debts over time in a court-approved repayment plan via Chapter 13 bankruptcy. It is important that debtors understand the key differences between Chapter 13 and Chapter 7 bankruptcy to make an informed decision before declaring their own case.
A General Comparison of Chapter 7 and Chapter 13 Bankruptcy
Chapter 7 is a straight liquidation, while Chapter 13 is a structured repayment plan designed for those with regular incomes. Some important comparisons include:
Operation - Chapter 7 and Chapter 13 have mandatory credit counseling within 180 days before filing. Chapter 7 requires a trustee to be appointed to administer the bankruptcy and all non-exempt assets will be surrendered for liquidation and distribution. For Chapter 13, a payment plan is submitted with the bankruptcy petition that outlines payments over a three to five-year period. Payments must be made from disposable income, but the plan allows the debtor to retain his or her assets.
Limitations - A debtor must pass the “means test” for Chapter 7 bankruptcy. This compares the debtor’s income to the state median. Also, a debtor cannot have any debts discharged in a previous Chapter 7 bankruptcy within eight years of filing for Chapter 7 again. Chapter 13 bankruptcy is reserved for debtors owing less than $383,175 in unsecured debt and less than $1,149,525 in secured debt.
Effect on Debts - Chapter 7 will discharge most unsecured debts upon the conclusion of the bankruptcy proceeding. All liability to these creditors ends with the court-entered discharge. In Chapter 13, all or a portion of the debt is paid off over time and secured debts (those not discharged in Chapter 7) can also be paid/discharged through a court-approved repayment plan. Once the plan is completed and a discharge order is entered, liability to the unsecured creditors ceases.
Effect on Home - To keep a home in Chapter 7, a debtor must maintain all mortgage payments. If they do, the home is preserved under the homestead exemption. However, the exemption only applies to up to a $155,675 value if the home was purchased less than 40 months prior to declaring Chapter 7 bankruptcy. You may also surrender a home in order to avoid the possibility of a deficiency judgment after a foreclosure. In Chapter 13, the debtor may choose to surrender their home or keep it. If the debtor is behind on the mortgage payments, the plan will address the arrearages owed to the lender as well as the ongoing payments.
Effect on Vehicles - In Chapter 7, a debtor may choose to surrender a vehicle that is financed or keep the vehicle and continue to make the payments. In Chapter 13, the same options are available; if the vehicle was purchased more than 910 days prior to the filing of the bankruptcy, it is also possible to reduce the loan to match the actual value of the vehicle.
Effect on Credit - For Chapter 7, the record of bankruptcy will remain on the consumer’s credit report for up to 10 years from the date of declaration. For Chapter 13, the record may remain on the consumer’s credit report for up to 10 years, but some creditors will report Chapter 13 payments for only seven years.
Contact Jodat Law Group, P.A. for More Information
If you have questions about consumer bankruptcy or you are unsure which type of bankruptcy is suitable for your situation, the bankruptcy lawyers at Jodat Law Group, P.A. are more than happy to help. Contact us online to schedule a consultation or call us at 877-JodatLaw now.